Income Tax Appellate Tribunal - Mumbai
Dr. (Mrs.) R.M. Captain vs Wealth-Tax Officer on 29 September, 1986
Equivalent citations: [1987]20ITD419(MUM)
ORDER
M.A. Ajinkya, Accountant Member
1. These two appeals, one by the assessee and the other by the department were heard together and they are disposed of by a consolidated order.
WT Appeal No. 787:
2. This is an appeal against the order of the Commissioner (Appeals)-VIII, Bombay, for the assessment year 1981-82. The assessee was a partner in a partnership firm called Himalaya Drug Co. The wealth-tax assessment for the assessment year 1981-82 for which the relevant valuation date is 31-3-1981 was completed by the First WTO, Asstt. Cir. VI, Bombay on 30-8-1983 on a net wealth of Rs. 55,81,122. The WTO determined the value of the assessee's interest in the firm in terms of Rules 2 and 2A to 2G of the Wealth-tax Rules, 1957 ('the Rules'). He specifically referred to Rule 2E to hold that amounts appearing in the balance sheet of the firm by way of development rebate reserve, investment allowance reserve, etc., could not be included in computing the net wealth of the firm. A claim was made before the WTO for deduction of gratuity reserve liability. The WTO held that Rule 2E provided that provision for any purpose other than taxation shall be treated as a reserve. Therefore, the amount standing to the credit of the account called 'gratuity reserve liability' was covered by the provisions of Rule 2E(b) or 2E(c) and Explanation to Rule 2E. Accordingly, such amount could not be treated as liability to be deducted from the net wealth of the firm. Consequently, the WTO added one-third of this amount in determining the value of the assessee's one-third interest in the firm. Thus, the WTO treated development rebate reserve, gratuity reserve liability and investment allowance reserve amounting in all to Rs. 47,35,192 as a liability and added one-third of the above amount (Rs. 15,78,397) to the net wealth of the assessee.
3. The matter was taken in appeal by the assessee where several authorities were cited. The Commissioner (Appeals) held that the authorities relied upon by the assessee's representative do not support the contention that Rule 2E to 2G do not come into play while working out the net assets of the partnership under Rule 2. The Commissioner (Appeals) relied on the decision of the Madras High Court in the case of CWT v. S. Ramaswami [1983] 140 ITR 606 which expressly stated that 'both Rule 1D read with Explanation II (ii)(b) and Rule 2 read with Rule 2E (c) of the Wealth-tax Rules expressly exclude from the computation of the net wealth of the companies or of partnerships, all contingent liabilities'. The Commissioner (Appeals) also held that the valuation of the net wealth of the partnership will be made on global method subject to the adjustments specified in Rule 2B to 2G. Reserves like development rebate reserve and investment allowance reserve cannot be deducted. Ho took note of the fact that the assessee had not set up an approved gratuity fund. Although the assessee's representative argued that the liability had been worked out on a scientific basis, such basis had not been furnished to the Commissioner (Appeals). The Commissioner (Appeals) relied on the decision of the Supreme Court in Bombay Dyeing & Mfg. Co. Ltd. v. CWT [1914] 93 ITR 603 and dismissed the appeal of the assessee. Hence, this appeal before us.
4. Shri Ketan Dalai, appearing on behalf of the assessee, stated that what was claimed as a deduction was the actuarial valuation of the gratuity liability of the firm. This valuation represented the value of the liability of the firm in praesenti towards payment of gratuity to its employees, although such payment had in fact to be made at a future date. He relied on a Circular No. 47, dated 21-9-1970 (see Taxmann's Direct Taxes Circulars, Vol. 1, 1985 edn., p. 407) issued by the Board in which the Board had directed that following the decision of the Supreme Court in the case of Metal Box Co. of India Ltd. v. Their Workmen [1969] 73 ITR 53, provision of gratuity on a scientific basis in the form of an actuarial valuation carried out every year can be considered to represent a real liability of the employer to the employee and the liability so ascertained cannot be considered as a contingent liability. Such provision of gratuity may be treated as an admissible deduction under Section 37(1) of the Income-tax Act, 1961 ('the 1961 Act'). He also relied on a decision of the Allahabad High Court in the case of Seth Satish Kumar Modi v. WTO. He also relied on several decisions of the Tribunal in the cases of Smt. Pramila Devi Jayaswal v. WTO [1985] 11 ITD 614 (Cal.) and Hansraj Vallabhdas v. Tenth WTO [1985] 13 ITD 259 (Bom.) (TM) on the interpretation of Rule 1D of the Rules in support of his case. He has filed the working of the actuarial valuation made by one Mr. Y.V. Deshpande, actuary dated 19-2-1984 of the gratuity liability of the firm as at 31-3-1981. Shri Dalai finally relied on the decision of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1981] 132 ITR 559 and in particular the portion of the head note at page 562.
5. In reply Shri Ray pointed out that the interest of the partner in a partnership firm had to be valued after first valuing the net wealth of the firm. The valuation of the net wealth of the firm was made in terms of Section 7 of the Wealth-tax Act, 1957 ('the Act') and Section 7 provided that the valuation of some of the assets had to be made in the light of the specific adjustments that were provided for in Rules 2A to 2G. According to Shri Ray, when specific Rules were provided for valuation of a particular asset, those Rules had to be given their proper interpretation and relevance. What was claimed by the assessee in the present appeal was only an actuarial valuation of its liability to pay gratuity which arose at a future date and which, therefore, was a contingent liability. Such liability which was not determinate was not allowable in view of the decision of the Supreme Court in Standard Mills Co. Ltd. v. CWT [1967] 63 ITR 470. Shri Ray also pointed out that after the introduction of Section 40A(7) in the 1961 Act the Supreme Court had occasion to deal with a liability of this type and its admissibility in income-tax assessment in a subsequent decision and in this context Shri Ray relied on the decision of the Supreme Court in the case of Shree Sajjan Mills Ltd. v. CIT [1985] 156 ITR 585. He also relied on another decision of the Supreme Court in the case of D.V. Bapat, ITO v. Tata Iron & Steel Co. Ltd. [1986] 159 ITR 938 (SC). Shri Ray finally submitted that the Commissioner (Appeals) was fully justified in giving the finding that he did and no interference was called for with the Commissioner (Appeals)'s order.
6. We have carefully considered the submissions made on both sides. We cannot persuade ourselves to accept the argument of Shri Dalai that the actuarial valuation of gratuity liability represents debt owed and should be allowed as a deduction in computing the net wealth of the assessee. In the present case primarily we are concerned with determining the assessee's interest in the assets of the firm in which she was a partner. The net wealth of the firm has been determined for this purpose with reference to the balance sheet of the firm in accordance with Section 7. Section 7(1) begins with the words 'Subject to any rules made in this behalf, . . . .' The rules made for this purpose are Rules 1B, 1BB, 1C, 1D and Rule 2. Any valuation of the assets of business under Section 7 has, therefore, of necessity to be made after taking into account the relevant rules made in this behalf. For the present purpose the relevant rule is Rule 2 which lays down how interest in partnership should be worked out. Rule 2(1) provides that the net wealth of the firm on the valuation date shall first be determined. Rule 2A provides that when the valuation of the assets of business is made under Section 7(2)(a) with reference to the net value of the assets of the business as a whole having regard to the balance sheet of such business, the WTO shall make the adjustments specified in Rules 2B to 2G. Rule 2E provides that:
The following amounts shown as liabilities in the balance sheet shall not be taken into account for the purposes of Rule 2A :--
(a) capital employed in the business other than that attributable to borrowed money ;
(b) reserves, by whatever name called ;
(c) any provision made for meeting any future or contingent liability ;
(d) any debt owed by the assessee which has been specifically utilised for acquiring an asset in respect of which wealth-tax is not payable under the Act :
It may be mentioned here that the word 'shall' is used in Rules 2, 2A to 2F and where specific adjustments are required to be made in a given set of circumstances, the WTO is obliged to make such adjustments, while making the valuation of business assets under Section 7. This position in law has already been recognised by the Supreme Court in the case of Juggilal Kamalapat Bankers v. WTO [1984] 145 ITR 485. On pages 494, 495 and 496 the Court have discussed the scope of Rule 2 concerning valuation of interest in partnership or an AOP. They have also taken note of Section 7 in this regard and on p. 496 the Court has observed that the said Sub-section (2) of Section 7 also says that the WTO has to make such adjustments therein as may be prescribed and in this behalf Rules 2A and 2B indicate what adjustments the WTO has to make while determining the net value of the business as a whole. On the claim for deduction of gratuity liability as provision, there is a direct decision of the Supreme Court in the case of Standard Mills Co. Ltd. (supra). The Supreme Court held :
. . . that the liability of the assessee to pay gratuity to its employees on determination of employment was a mere contingent liability which arose only when the employment of the employee was determined by death, incapacity, retirement or resignation : the liability did not exist in praesenti. The amount claimed could not be deducted as a 'debt' in computing the net wealth of the assessee. Nor could such a contingent liability be taken into account in computing the net value of the assets of the assessee under Section 7(2)(a) of the Wealth-tax Act, 1957.
This decision was reiterated by the Supreme Court in a specific decision in the case of Bombay Dyeing & Mfg. Co. Ltd. (supra). Both these decisions under the Act and directly on the issue raised by the assessee. Both the decisions have in unequivocal term, stated that a provision for gratuity is not a liability in praesenti and, therefore, not an allowable deduction. In this decision the Supreme Court has clearly stated that there is no conflict between their decision in Metal Box Co. of India Ltd.'s case (supra) rendered under the Payment of Bonus Act, 1965 and Standard Mills Co. Ltd.'s case (supra) rendered under the Wealth-tax Act. The Board's circular, therefore, does not help the appellant.
7. The assessee's representative relied on a decision of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra). This was in support of the argument that the gratuity provision made on a scientific basis is not a reserve. The assessee conceded that this decision was given in the context of the Companies (Profits) Surtax Act, 1964, but submitted that it would also apply in the context of the Wealth-tax Act. This argument of the assessee is squarely met by pointing out that in the same judgment the Supreme Court took note of their earlier decision in the case of Standard Mills Co. Ltd. (supra) and made the following observation :
. . . It will thus appear that this Court was of the view that though such a liability is a contingent liability and, therefore, not a 'debt' under Section 2(m) of the Wealth-tax Act it would be deductible under the Income-tax Act while computing the taxable profits ; in other words different considerations would apply to cases arising under the Wealth-tax Act and the Income-tax Act.
Thus, the Supreme Court clearly laid down that different consideration would apply to cases arising under the Wealth-tax Act and the Income-tax Act. Notwithstanding this observation of the Supreme Court in the context of the admissibility of a liability of this type in computing the net wealth, even under the 1961 Act the Supreme Court in a later decision has struck a different note. Reference may be made to their decision in the case of Shree Sajjan Mills Ltd. (supra). In this case the Supreme Court held that:
Contingent liabilities do not constitute expenditure and cannot be the subject matter of deduction even under the mercantile system of accounting. Expenditure which is deductible for income-tax purposes is towards a liability actually existing at the time but setting apart money which might become expenditure on the happening of an event is not expenditure.
The Supreme Court held that the position till the provisions of Section 40A(7) were inserted in the Act was that provision made by setting aside an advance sum every year to meet the contingent liability for gratuity as and when it accrued by way of provision for gratuity or by way of reserve or fund for gratuity was not allowed as an expenditure of the year in which such sum was set apart. The scope of Section 40A(7) the legislative intent behind enacting it was discussed at length by the Supreme Court which observed as under :
The submission of the assessee that if no provision is made by the assessee for gratuity, still the same will be deductible and Section 40A(7) will have no application, would defeat the very purpose and object of Section 40A(7) and render it nugatory. The interpretation as suggested by the assessee would entitle the assessee who made no provision to claim deduction whereas an assessee who made a provision would not get deduction unless the requirements laid down in the sub-section are fulfilled. This interpretation, if accepted will lead to a curious result, and if one may venture to say, an absurd result, . . .
It would thus be clear that under the provision of the 1961 Act the deduction in respect of the actuarial value of the liability for gratuity is admissible as a deduction in the computation of income only if certain conditions specified in the Act are fulfilled.
8. The assessee's representative also relied on two decisions of the Allahabad High Court in the case of CWT v. Padampat Singhania [1973] 90 ITR 418 and CWT v. Laxmipat Singhania [1974] 97 ITR 188. They are distinguishable on facts and have no relevance to the issue before us. In the case of Padampat Singhania (supra), the Allahabad High Court held that 'while determining the net wealth of the firm, not for the purpose of its assessment but for the purpose of finding out an assessee's share in it, items (a) and (b) of Sub-clause (iii) of Section 2(m) would not be applicable'. The question there was whether in computing the net wealth of the firm for the purpose of working out the value of interest of the partner the income-tax liability due from the firm should be taken into account. This is not the question before us. We are concerned with the question whether the actuarial valuation of the firm's liability towards payment of gratuity constitutes a liability in praesenti in the hands of the firm and whether, therefore, correspondingly the partner's share has to be also treated as a liability in praesenti and allowed as a deduction. For this purpose we are concerned with the interpretations of Rules 2B to 2G and in particular Rule 2E. Similarly, in the second case relied on by the assessee's counsel in the case of Laxmipat Singhania (supra) the same decision as the one given in Padampat Singhania's case (supra) was given. Therefore, both these cases do not help the assessee in any way.
9. Before parting with this appeal, we may refer to one of the latest decisions of the Supreme Court in Tata Iron & Steel Co. Ltd.'s case (supra). The Supreme Court set aside the Bombay High Court's decision in Tata Iron & Steel Co. Ltd. v. D.V. Bapat, ITO [1975] 101 ITR 292 and directed that the High Court should examine whether the provisions of Section 40A(1)(b)(ii) which have been recently construed by the Supreme Court in Shree Sajjan Mills Ltd.'s case (supra) have been complied with having regard to what has been laid down by the Supreme Court in that case.
10. Having thus considered all aspects of the issue in dispute as discussed in the preceding paragraphs, we would hold that the assessee is not entitled to a deduction of one-third share of the gratuity liability of the firm in the computation of his net wealth. We would, therefore, confirm the order of the Commissioner (Appeals) and dismiss the assessee's appeal.
WT Appeal No. 1866
11. The only question raised in this appeal is that the Commissioner (Appeals) erred in holding that the value of the shares of Himalaya Drug Co. (P.) Ltd. should be adopted as per the yield method and not as per Rule 1D. The assessee held 1010 shares in a company called Himalaya Drug Co. (P.) Ltd., the value of which was reported by it at Rs. 162.90 lakhs on yield basis. The WTO applied the provisions of Rule 1D and worked out the value at Rs. 699 per share. In appeal before the Commissioner (Appeals) the assessee claimed that the value should be determined on yield basis and relied on the decision of the Commissioner (Appeals) dated 29-5-1981 in the assessee's own case for the assessment year 1980-81. The company in which the assessee holds shares is a running concern and the shares are not quoted in the market. We would, therefore, hold, following the decision of the Bombay High Court in the case of Smt. Kusumben D. Mahadevia v. CWT [1980] 124 ITR 799, that the Commissioner (Appeals) was right in directing the WTO to determine the value of shares on yield basis. We decline to interfere with the order of the Commissioner (Appeals). Consequently, the departmental appeal fails and is dismissed.
12. In the result, both the assessee's and the department's appeals are dismissed.